The immediate concern for many Indians is the strengthening of the rupee vis-à-vis the US dollar this year, writes Narayanan Madhavan.

I wish I had all the time in the world to study how currency markets move, given the tumultuous changes this year in global financial markets.

In a limited way, I would like to make some guesses based on some of the developments this year.

The immediate concern for many Indians is the strengthening of the rupee vis-à-vis the US dollar this year, by more than 10 per cent since January with the dollar dipping below Rs 40, a psychological benchmark.

We have already heard about exporters cribbing that the strong currency is eroding their competitiveness, and threatening jobs. Even the booming software and business process outsourcing (BPO) industries are worried, though their competitiveness is not really threatened. Just imagine the horrible prospect of special economic zones (SEZs) sprouting across the country to boost exports, while global capital inflows continue in a high-growth Indian economy.

To be precise, all pointers are towards the rupee getting even stronger. As I had remarked some months ago, the "precious" foreign exchange is no longer really precious.

Sophists will argue that India's rupee has strengthened only with regard to the US dollar, and not the euro, but in many ways the simple fact is that exports have become tougher while imports have become cheaper.

This week, we have two indications on what the rupee might do next.

Foreign fund managers now think it will be cheaper to repatriate money from India if the rupee becomes stronger. This is one of the reasons behind the surge in stocks this week. The rupee's expected appreciation adds to medium-term prospects of those who want to take money out of the country. This could bring in more foreign exchange into the country, and make the talk of a stronger rupee a self-fulling prophesy.

At the same time, there are indications that some sectors, such as textiles and chemicals, may feel the heat from foreign competitors. With elections approaching, I do see the prospect of some domestic industries raising a nationalist or protectionist flag against competition from imports.

Commerce Minister Kamal Nath has already asked exporters to live with a stronger rupee, but both exporters and domestic industries will likely argue for more time to reinvent themselves for the age of the strong rupee, which would have been unthinkable a decade ago.

Meanwhile, Europe is worried about the Chinese yuan. News reports this week from Europe say that officials are worried about the weakness of the yuan, the Japanese yen and the US dollar which are eroding the zone's competitiveness. They complain that the Chinese yuan is being engineered marginally higher against the dollar in reply to US demands, but is going in the opposite direction versus the euro, thereby penalising Europe unfairly.

I also ask a simple question: Is the yuan penalising Indian exporters and domestic industries as well? I would think so, but nobody seems to be talking about what an artificially manipulated yuan is doing to Indian goods and services, even as talk grows of China competing with India on possibly every economic front.

India could possibly engage Europe in the coming days to find out if there are ways to tackle the rupee and euro issues. Something tells me that the time has come for a wider, deeper debate on the implications of artificially manipulated currencies in a globalised economy.